Purchasing a second trust from foreclosure auction-Process?

Question

Hi All:

I usually purchase 1 lien positions from foreclosure trustee sales. I have never purchases a 2nd trust before, but came across a property where the 2nd trust is being sold via trustee foreclosure sale. Understandably, the winning bidder for the 2nd trust is responsible for the 1st lien.

My question is to do with the process. How does the successful bidder of the 2nd trust go by paying off/purchasing the 1st trust to complete ownership of the property. Do you need the previous owner's consent to payoff that mortgage?  Is this an automatic right of the successful bidder of the 2nd trust or are there any other caveats involved? The property is located in MD.

Thanks in advance.

Wayne Brooks · Answer

@Jesse Morrell You have a better understanding now. But when buying through a second mtg foreclosure....no, the first will not let you bring it current then make the payments. The balance will be due in full.

Wayne Brooks · Answer

@Jesse Morrell Yes, you have few things backwards....

-When buying at a foreclosure auction, you Are buying the property, not the lien...the lien is extinguished at the sale.
-When you buy a foreclosure by a second mtg holder, the first mtg Stsys on the property, since it is superior. You must then pay it or be foreclosed by the 1st position lien holder.

-When buying a first mtg foreclosure, the second mtg, and any other junior liens, get wiped out and are not the responsibility of the buyer.
-A first mtg holder gets no proceeds from a second mtg foreclisure.

Ron S. · Answer

Not much of what you said is accurate.

Roman M. · Answer

You are not responsible for paying the 1st mortgage but it is a lien on the property that is superior to your purchase so you want to make sure you don't get foreclosed on by the 1st. Probably they won't talk to you because you are not the borrower. If you could find out how much the loan is in arrears and send them a check to bring it current, it will buy you some time. Other options is try to obtain payoff through the title company (they might need borrowers SSN).

Jesse Morrell · Answer

@Jacob Beg I also buy at trustee foreclosure auctions. My understanding is that buying the 2 lien, without buying the 1 lien, is how you can seriously lose your money.

2 liens get auctioned off because that’s just the legal process. But it’s getting auctioned off because its not getting paid. The property owner isn’t going to suddenly start paying that lien.

You get your money for a 2 lien if he sells the house, which he may not do. If he forecloses because he also doesn’t pay the mortgage, my understanding is that your 2 lien remains on the property and you’d be paid when the house eventually sells retail, as the person who buys the 1 lien at auction inherits the 2 lien also.

The risk, at least here in Texas, is that if he doesn’t pay property taxes and the property goes to Sheriff Tax Sale, all liens and mortgages on the property fall off and you lose all your money.

That’s the nightmare situation some investors have fallen into, when they bought the 2 lien by mistake thinking they were buying the property, and then it goes to Sherif Sale for taxes.

But to be clear, buying the 2 lien is not buying the property. It’s buying the 2 lien only.

That’s my understanding from what I’ve read about it. Curious, how did you know it was the second lien being sold? I’ve heard of them being auctioned off but I haven’t seen the paper work of them yet. Sometimes I see Notice of Trustee Sale papers saying “the mortgage or lien is being auctioned.”

Tom Gimer · Answer

@Jacob Beg The foreclosure purchaser should be considered a successor in interest to the prior owner and as such should be able to obtain a current payoff statement without the authorization of the prior owner.

Jesse Morrell · Answer

Maybe I heard wrong about Trustee Auction properties not wiping out liens in Texas:

“Properties may (and often do) have multiple liens against them. “A valid foreclosure on a senior lien (sometimes referred to as a ‘superior’ lien) extinguishes a junior lien (sometimes referred to as ‘inferior’ or ‘subordinate’) if there are not sufficient excess proceeds from the foreclosure sale to satisfy the junior lien . . . In general, mechanic’s liens whose inception is subsequent to the date of a deed-of-trust lien will be subordinate to the deed-of-trust lien.” Trinity Drywall Systems, LLC v. TOKA General Contractors, Ltd., 416 S.W.3d 201 (Tex.App.-El Paso 2013, no pet.). As to competing M&M liens, a perfected M&M lien is deemed to relate back in time to the date of its inception. Leases, including ground leases, are generally terminated as well. Kimzey Wash, LLC v. LG Auto Laundry, LP, 418 S.W.3d 291 (Tex.App.-Dallas 2013, no pet.).

Notice to the IRS

The best practice is to do a title search prior to foreclosure to determine if there is an IRS tax lien or other federal lien. If so, notice must be given to the IRS and/or the U.S. Attorney at least 25 days prior to the sale, not including the sale date. 26 U.S.C. § 7425(c)(1). If this is not done, any IRS tax lien on the property will not be extinguished by the sale. Note that the IRS also has 120 days following the sale to redeem the property, although this seldom happens. The successful bidder on an IRS-liened property is therefore not entitled to breathe a sigh of relief until the 121st day.”

Jesse Morrell · Answer

@Wayne Brooks so if you buy the property through the second lien at auction, you inherit the first lien with it. But if you buy the property through the first lien, the second liens get wiped out?

My understanding for Texas was that liens only get wiped out at the County Sherif Tax Sale, but properties auctioned at the Trustee Sale come with any and all liens attaches to the property - none get wiped out.

So when I buy a property in Texas, I search for any liens and am ready to pay any of them if I buy the property. So far I’ve just purchased first liens with no secondary, and never wanted to buy any second liens because I was unsure of them.

But it makes sense to me, if you buy the second you get the property and are now responsible for the first. That helps me out a lot. Thanks guys.

Along these liens, has anyone ever purchased a property through the second lien and then negotiated Subject To with the first lien holder, merely bringing it up to date rather then paying it off?

Ron S. · Answer

if you mean foreclosure auction, you are buying the property, subject to the 1st lien, meaning, yeah, you get the property but you also get the senior lien that needs to be paid off in full.

Jesse Morrell · Answer

@Ron S. Yes I think another scenario I heard of it people buying second liens by mistake (thinking they got a really cheap deal), thinking they were buying the first, only to find out later and not having enough to pay off the first.

Purchasing a second trust from foreclosure auction-Process?

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